Bajaj Finance’s Q3FY26 performance reflects a deliberate trade-off between short-term profitability and long-term balance-sheet strength. Axis Securities maintains a BUY rating as the NBFC accelerates provisioning through a permanent LGD reset, dampening near-term earnings but materially enhancing resilience. While PAT missed expectations due to elevated credit costs, core operating metrics remained intact, with stable NIMs, healthy AUM growth, and improving asset quality indicators. Management’s emphasis on disciplined underwriting, a gradual recovery in MSME lending, and the run-down of high-stress captive finance positions the company for a RoA rebound toward 4.4 percent by FY27–28.

Axis Securities’ Investment Thesis: Strength Before Speed

Axis Securities’ BUY recommendation is anchored in Bajaj Finance’s strategic decision to prioritize balance-sheet durability over aggressive growth. The firm’s introduction of a minimum Loss Given Default floor across all lending segments resulted in accelerated expected credit loss provisioning of Rs 14.1 billion in Q3FY26. While voluntary, this policy change is permanent and materially lifts the provision coverage ratio, reducing downside risks across future credit cycles.

Importantly, management expects the cascading impact of this LGD reset to be limited to Rs 3–4 billion in FY27, spread evenly through the year. This proactive stance, rather than reactive provisioning, underpins Axis Securities’ confidence in a normalized credit cost trajectory of 165–175 basis points in FY27.

Q3FY26 Results: Operationally Sound, Earnings Temporarily Compressed

Core operating performance remained largely in line with expectations, even as reported profits softened. Net interest income rose 21 percent year-on-year, while pre-provision operating profit expanded nearly 19 percent, reflecting sustained operating leverage. However, higher provisioning and a one-off labor-law related charge of Rs 2.65 billion weighed on bottom-line growth.

Net profit declined 6 percent year-on-year, missing estimates, but Axis notes that absent the policy-driven provisioning spike, underlying credit costs would have continued to trend lower sequentially.

Asset Quality: Early Signs of Stabilisation Emerging

Asset quality metrics showed tangible improvement, reinforcing management’s confidence in FY27 normalization. Gross NPAs declined to 1.21 percent, while net NPAs improved to 0.47 percent. Provision coverage strengthened sharply to 61 percent, up from 52 percent in the prior quarter.

Crucially, the Stage-2 loan pool has begun to shrink, and vintage credit performance across cohorts has improved. The gradual exit from captive two-wheeler finance — a segment contributing disproportionately to stress — is expected to further ease asset quality pressure over the next four to six quarters.

Growth Strategy: Discipline Now, Acceleration Later

Bajaj Finance is deliberately moderating growth to protect return metrics. AUM expanded 22 percent year-on-year, aligned with management’s FY26 guidance of 22–23 percent. Growth was constrained by tighter underwriting in MSME lending and the intentional run-down of captive auto finance, where balances fell sharply.

Axis Securities highlights that MSME disbursement volumes declined 25–30 percent following stricter credit filters. However, management expects stress in this portfolio to recede by H2FY27, enabling a return to 20 percent plus growth thereafter.

Segmental Outlook: New Engines Taking the Lead

Growth leadership is shifting toward newer, lower-risk segments. The B2B portfolio is expected to grow in the mid-teens, reflecting its mature scale, while most consumer and retail segments are guided to expand 20–25 percent annually.

Notably, the new car financing book is projected to grow in the early-30 percent range, while commercial vehicle and tractor financing could expand 30–40 percent in FY27. Gold loans, though on a smaller base, continue to record robust traction, supported by deeper distribution and rising branch productivity.

NIMs and Cost Structure: Stability With Incremental Upside

Net interest margins are expected to remain broadly stable. Axis Securities forecasts NIMs in the 8.7–8.8 percent range over FY27–28, supported by a steady cost of funds and a largely unchanged portfolio mix. Borrowing costs are expected to remain range-bound near 7.55–7.6 percent, with limited room for further compression.

Operating efficiency remains a structural positive. Cost-to-income ratios held steady at 32.8 percent, and further gains are anticipated as AI-driven productivity initiatives scale across operations.

FINAI and AI Deployment: Productivity as a Margin Lever

Artificial intelligence is emerging as a meaningful earnings catalyst. Bajaj Finance’s FINAI platform has already converted over 20 million customer calls from voice to text, generating data-driven insights for millions of customers and enabling personalized offers at scale.

AI-enabled automation now covers over 40 percent of document processing, with management targeting 85–90 percent automation over the next 15 months. AI-assisted disbursements have already exceeded Rs 1,500 crore, reinforcing Axis Securities’ view that operating leverage will continue to improve structurally.

Financial Outlook: RoA Recovery Anchors the Bull Case

Axis Securities expects profitability to rebound meaningfully from FY27 onward. Return on assets is projected to improve to 4.3–4.4 percent over FY27–28, driven by moderating credit costs, stable margins, and operating leverage.

Over FY26–28, the brokerage expects Bajaj Finance to deliver a compounded annual growth rate of 24 percent in AUM, 22 percent in NII, and 27 percent in earnings, despite conservative near-term provisioning.

Valuation and Target Price: BUY Reaffirmed at Rs 1,150

The stock currently trades at approximately 4.1x Sep’27E adjusted book value. Axis Securities values Bajaj Finance at 4.9x Sep’27E ABV, resulting in a revised target price of Rs 1,150, implying an upside of about 19 percent from the current market price of Rs 964.

While the target has been trimmed from Rs 1,200 to reflect near-term earnings moderation, the long-term investment case remains intact.

Key Risks to the Thesis

Axis Securities flags macro-driven credit slowdown as the principal risk. Prolonged weakness in borrower demand or slower-than-expected scaling of newer products could pressure growth assumptions. Additionally, adverse customer behavior among new-to-franchise borrowers remains a monitorable risk.